Bad Timing. Not Always Bad Outcomes



Given what we know today, October 9, 2007 seems like a lousy day to invest in the S&P 500.  This was the peak of the market before the Great Recession.  The S&P 500 total return index (which includes dividends reinvested) traded at 2447 on that day, fell 54% to 1104 on March 5, 2009, and didn’t recover back to its starting level until November 2012.  Despite this, investors that were unlucky enough to buy at the top of the market still did fine (assuming they didn’t panic and sell).  Currently the index is at 4843 which means the unlucky investors nearly doubled their money over the past 10 years – a 7% compound annual return.

This got us thinking-how often would an investor have suffered a loss over a ten year period? The chart below shows the trailing 10 year annualized returns for the S&P composite index going back to mid-1950.  There was only one brief period when the trailing 10 year returns for an investor were negative. This coincides with an investor putting money in the market at the height of the dotcom bubble in late 1999.

While current valuations on US stocks are high they are not at the levels we saw in 1999.  We have said before that we think the returns over the next five years may not be as good as the 15% per year returns of the last five years (see chart below of rolling five year returns).   But that doesn’t mean an investor coming into the market today won’t still have the opportunity to compound their money at a reasonable rate.  Based on the strong returns in the US market over the past five years it may be a good time to rebalance portfolios but it is unlikely that the wise decision is to sell everything.